Page 52 - Azerbaijan State University of Economics

Seda Ozekicioglu, Yilmaz Bayar: Tax revenues, corruption and governance in OECD
countries: a panel regression analysis

main determinants of tax revenues. Besides, corruption is a very significant determinant of a
country’s tax revenue performance. The variety in tax structures and tax levels are also important
decisions of a government to increase tax revenues.

According to OECD Government at a Glance 2017, between 2009-2015 government
expenditures as share of GDP decreased by 3,3% on OECD countries average and in 2015
government expenditures represented 40,9% of GDP on average. In the same report it was
mentioned that between 2007-2015 government spending increased the most on social protection
(2,6 per person) and health care (1,7 per person) across OECD countries. One-third of public
investment is directed toward economic affairs, mainly to transportation, followed by defense.
However, on average in OECD countries, 42% of citizens reported having confidence in their
national government in 2016, compared to 45% before 2007.
Taxation is the legitimate and legal way of allocating resources from the economy. While
taxation allocates resources and promotes economic growth, over-taxation may also have
negative impact on the economy. Public resources are increased by taxation in terms of supply
side leading to increase in quantity and quality of public goods and services (Nawaz, 2010: 5).
Tax payers as demand side may incline towards tax evasion, tax avoidance and underground
economy due to high taxes.

Effective taxation system in a country, higher quality of public administration and strong legal
structure affect the quality of governance positively. The operation of an effective tax collection
mechanism depends on the government policy which the government responds more to the needs
of its citizens and the citizen representatives occupy more space in the governance (Moore, 2015:
3). The ‘Government Effectiveness’ of WGI assesses quality of public and civil services as
governance sources. Quality of governance of a country is an important criterion for the country
to develop in the long term (Ajaz and Ahmad, 2010: 405). Therefore, increase in tax revenues
can be achieved by increasing government’s quality of governance and effectiveness of tax
structures (Bird and Zolt, 2008: 33).

Strong links between taxation and governance in public administration directly lead to the
indirect relations with corruption. In order to support economic growth, governments should
make public expenditures and therefore they should increase their tax revenues as their major
financial resources. The most significant way of increasing tax revenues is to strengthen tax
administration. Governments should be transparent, accountable and responsive against tax
payers while attempting to increase their tax revenues (Prichard, 2016: 2).
The corruption is a multi-dimensional problem consisting of general and specific factors. In
literature, corruption is defined as “abuse of entrusted power for private gain” (Transparency
International, 2017). Another general definition of corruption is “the illegal use of public office
or the process of selection to public office for private gain” (Theobald, 1990: 16). Theoretically a
bilateral interaction between corruption and tax revenues is expected, because higher tax rates
lead the corruption. In turn, corruption decreases the tax revenues. Taxation may cause problems
by increasing the level of corruption in the country if perceived as excess burden by tax payers.

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